Buffett looks to Japan with 5% buy in each of 5 biggest trading firms

Tokyo

BERKSHIRE Hathaway Inc has bought a 5 per cent stake in each of Japan's five biggest trading houses, together worth over US$6 billion, marking a departure for chairman Warren Buffett as he looks beyond the United States to diversify his conglomerate.

The long-term investment in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co Ltd and Sumitomo Corp could see the stakes rise to 9.9 per cent, Berkshire said on Sunday, Mr Buffett's 90th birthday.

"The five major trading companies have many joint ventures throughout the world and are likely to have more," Mr Buffett said in a statement. "I hope that in the future there may be opportunities of mutual benefit."

The investment will help reduce Berkshire's dependence on the US economy, which in the last quarter contracted the most in at least 73 years as the Covid-19 pandemic took hold. Many of its businesses have struggled, including aircraft parts maker Precision Castparts from which it bore a US$9.8 billion writedown.

Mr Buffett's choices in Japan, however, surprised market players as trading houses have long been far from investor favourites. As well as significant exposure to the energy sector and resource price volatility, tangled business models involving commodities as varied as noodles and rockets have long been a turn-off.

"Their cheap valuation may have been an attraction," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. "But it is un-Buffett-like to buy into all five companies rather than selecting a few."

Berkshire bought the little-over 5 per cent stakes in about a year through insurance business National Indemnity. Together, five 5 per cent stakes were worth 700 billion yen (S$9 billion), Reuters calculations showed based on Refinitiv data.

Firms' shares often rise when Mr Buffett discloses an investment, reflecting what investors view as his imprimatur. On Monday, Marubeni and Sumitomo ended up over 9 per cent, followed by Mitsubishi and Mitsui at over 7 per cent. Itochu rose 4.2 per cent to a record high.

Even so, Marubeni, Mitsubishi and Sumitomo are still 10 per cent down on the year, versus a 6 per cent fall in the Topix index. Itochu, which has shifted towards consumer-related businesses, is the only one whose share price is higher than last year.

Indeed, Itochu is the only one whose stock trades above its book value. That means, for the other four, their market capitalisation is less than the value of their assets, making them attractive to a value investor like Mr Buffett.

Several have large amounts of cash on hand, raising their appeal. Mitsubishi, for instance, has seen steady growth in free cash flow per share for four years, Refinitiv data showed.

Trading houses are also deeply involved in the real economy in areas such as steel, shipping, commodities, putting them on the radar of an investor such as Mr Buffett who famously avoids investing in businesses he claims not to understand.

Asked about the investment, Mitsui said it aims to improve returns for all shareholders. Marubeni and Mitsubishi said they will continue efforts to improve corporate value. Sumitomo said it will communicate with Berkshire as with all other shareholders. Itochu was not available to comment.

Berkshire owns more than 90 businesses outright including the BNSF railroad and Geico car insurer. It has a roughly US$125 billion stake in Apple based on its holdings as of June 30. REUTERS.